Tax Department Shouldn’t Exploit Taxpayers’ Lack of Knowledge: Delhi HC

CIT Vs Heidrick And Struggles Inc. (Delhi High Court)

Introduction: In the case of CIT Vs Heidrick And Struggles Inc., the Delhi High Court addressed a crucial aspect of taxpayer rights, emphasizing the duty of the tax department to assist taxpayers and refrain from exploiting their lack of knowledge. This article provides a detailed analysis of the judgment and its implications.

Detailed Analysis:

1. Background of the Case: The appellant, the revenue authority, sought condonation of delay in re-filing the appeal, which was granted. The case pertained to the imposition of tax on income received by the respondent for services rendered to an Indian company, Heidrick and Struggles India Pvt. Ltd. (HSIPL).

2. Rectification Application: The respondent initially reported the income under the head “Income from Other Sources” in their Return of Income (ROI). Despite a rectification application, the Centralized Processing Centre (CPC) did not alter its decision.

3. Appeal to CIT(A) and Tribunal: The CIT(A) upheld the CPC’s decision, prompting the respondent to appeal to the Tribunal. The Tribunal, after careful consideration, overturned the CIT(A)’s decision, citing provisions of the India-USA Double Taxation Avoidance Agreement (DTAA) and CBDT Circular No.14/1955.

4. Key Observations by the Tribunal: The Tribunal noted that the income in question was not taxable under the Indo-USA DTAA. Additionally, the CPC had rectified similar cases involving other group companies. The Tribunal also emphasized the duty of the revenue authorities to assist taxpayers, as outlined in the CBDT circular.

5. Delhi High Court’s Ruling: The Delhi High Court upheld the Tribunal’s decision, reiterating that the tax department can only levy tax on income falling within the ambit of the law. Mere misreporting of income by the taxpayer does not warrant imposition of tax.

Conclusion: The judgment in CIT Vs Heidrick And Struggles Inc. underscores the importance of upholding taxpayer rights and ensuring fair treatment by tax authorities. By affirming the duty of the tax department to guide taxpayers and avoid taking advantage of their lack of knowledge, the Delhi High Court has set a precedent for taxpayer-friendly administration. This ruling serves as a reminder of the principles of fairness and equity in tax matters, ultimately fostering trust and confidence in the tax system.

FULL TEXT OF THE JUDGMENT/ORDER OF DELHI HIGH COURT

1. This is an application moved on behalf of the appellant/revenue, seeking condonation of delay in re-filing the appeal.

2. According to the appellant/revenue, there is a delay of 180 days.

3. Mr Rohit Tiwari, who appears on behalf of the respondent/assessee, does not oppose the prayer made in the application.

4. Accordingly, the delay is condoned.

4.1 The application is disposed of, in the aforesaid terms.

ITA 396/2023

5. This appeal concerns Assessment Year (AY) 2018-19.

6. Via this appeal, challenge is laid to the order dated 26.08.2022 passed by the the Income Tax Appellate Tribunal [in short, “Tribunal”].

7. According to Mr Sanjay Kumar, learned senior standing counsel, who appears on behalf of the appellant/revenue, the short issue which arises for our consideration is: Whether the Tribunal could have overturned the view taken by the Commissioner of Income Tax (Appeals) [in short, “CIT(A)”] and the Assessing Officer (AO), that the rectification which the petitioner sought concerning the subject income being inadvertently shown under the wrong head, could not be dealt with, under Section 154 the Income Tax Act, 1961 [in short, “Act”].

8. The brief facts which arise for our consideration concern imposition of tax on the income received by the respondent/assessee, for services rendered to an Indian company, namely, Heidrick and Struggles India Pvt. Ltd. [in short, “HSIPL”]

9. The respondent/assessee had filed its Return of Income (ROI), wherein the income received from HSIPL on account of services rendered, e., Rs.2,84,40,475/-, was shown under the head ^„Income from Other Sources”. The record shows that the return was processed under Section 143(1) of the Income Tax Act , 1961 [ in short “Act”] by the Centralized Processing Centre, Bengaluru [in short, “CPC”].

10. The record also discloses that the petitioner moved a rectification application, which did not find favour with the CPC. The CPC issued an intimation/order dated 14.06.20 19, in that regard.

11. Being aggrieved, the respondent/assessee preferred an appeal with the CIT(A).

11.1 The CIT(A) did not disturb the intimation/order dated 14.06.2019 issued under Section 143(1) of the Act.

12. It is in these circumstances that the respondent/assessee carried the matter in appeal to the Tribunal.

13. The Tribunal, after having perused the material on record, made the following crucial observations in paragraphs 9 to 12 of the impugned order:

“9. We have heard the parties, perused the material on record and gave our thoughtful consideration. It is admitted fact that the assessee has filed its return claimed service income of Rs. 2,84,40,475/- received from Heidrickand Struggles Pvt. Ltd. as income from other sources. As per India US Tax Treaty, the service rendered by the assessee do not specify the ‘make available clause of India US Tax Treaty’ . It is also emerges  from the record that for the Assessment Year 2018-1 9 a similar adjustment i.e. taxing a service receipt 40% was levied by CPC, Bangalore in the case  of assessee’s group company i.e. Heidrick and Struggles Pvt. Ltd.  Singapore, Heidrick and Struggles Pvt. Ltd. UK, the said assessee has  preferred an application for rectification wherein the rectification  applications have been allowed by the CPC on 2 7/02/2020 and 30/01/2020 which are found place in the paper book Page No.300 -307 and 361 to 368. Further, it is not in dispute that as per India US Tax  Treaty the impugned income is not chargeable to tax as per the provisions of Article 12 of India USA Tax Treaty.

10. As per the Central Board of Direct Taxes, CBDT Circular No.14 reads as follows:-

Officers of the Department must not take advantage of ignorance of an assessee as to his rights. It is one of their duties to assist a taxpayer  in every reasonable way, particularly in the matter of claiming and  securing reliefs and in this regard the Officers should take the  initiative in guiding a taxpayer where proceedings or other  particulars before them indicate that some re fund or relief is due to  him. This attitude would, in the long run, benefit the Department for it would inspire confidence in him that he may be sure of getting a  square deal from the Department. Although, therefore, the responsibility for claiming refunds and reliefs rests with assessee on  whom it is imposed by law, officers should

(a) Draw their attention to any refunds or reliefs to which they appear to be clearly entitled but which they have  omitted to claim for some reason or other;

(b) Freely advise them when approached by them as to their rights and liabilities and as to the procedure to be adopted for claiming refunds and reliefs.”

11. Further, in the case of Madhabi Nag Vs ACTT (ITA No. 512/K01/2015) (Kolkata), the Hon’ble Tribunal held that the revenue authorities ought not to Have rejected the application u/s 154 of the Act on the ground that the assessee has riot filed the revised return of income. Further in the case of CIT v. Bharat General Reinsurance Co. Ltd. 81 ITR 303 (Del) (Hon’ble Delhi High Court), the Hon’ble High Court held that merely because the assessee wrongly included the income in its return for a particular year, it cannot confer jurisdiction on the department to tax that income in that year even though legally such income did not pertain to that year.

12. In our opinion, the addition has been made only due to wrong reporting of income by the assessee which cannot be sustained. Therefore, in our opinion, the Ld. CIT(A) has committed an error in dismissing the  appeal filed by the assessee. Accordingly, we allow the Assessee’s Grounds of Appeal No.1 and 2.”

[Emphasis is ours]

14. What emerges from a reading of the impugned order is the following:

(i) It is not the case of the appellant/revenue that the subject income, i.e., the income received by the respondent/assessee for the services rendered to an Indian company, i.e., HSIPL, was taxable.

(ii) The benefit of Article 12¹ of India-USA Double Taxation Avoidance Agreement [in short, “Indo-USA DTAA”] was available to the respondent/assessee.

(iii) The rectification had been ordered by the CPC with respect to two other group companies, i.e., Heidrick and Struggles Pvt. Ltd. Singapore, Heidrick and Struggles Pvt. Ltd. UK, in similar circumstance, via order dated 27.02.2020 and 30.01.2020,

(iv) The CBDT‟s Circular No.14/1955 dated 11.04.1955 was applicable in the instant case, which, inter alia, casts a duty on the officers of the appellant/revenue to draw the attention of the assessee towards any relief that may be available to them, which the assessee may have inadvertently omitted to claim.

15. Having regard to the aforesaid, we are of the view that the Tribunal has taken a just view in consonance with the provisions of the Act and the

ROYALTIES AND FEES FOR INCLUDED SERVICES

1. Royalties and fees for included services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.

2. (x)

3. (x)

4. For purposes of this Article, “fees for included services” means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel) if such services :

6. (x)

7. (x)

aforementioned circular issued by the CBDT. Undoubtedly, the appellant/revenue can seek to levy tax only on income which falls within the ambit of the Act. Merely because the respondent/assessee placed the income under a wrong head, cannot possibly make it amendable to imposition of tax.

16. According to us, no substantial question of law arises for our consideration.

17. The appeal is, accordingly, closed.